Bloomberg provides us with an article – "Contagion Thesis Once Derided Proven by Kristin Forbes" – profiling Ms. Forbes in a fulsome manner. She is obviously the mainstream's latest economic celebrity.
This is an interesting phenomenon, in fact, where economists and bankers are treated like rock stars, celebrated for a brilliance that only their peers can truly understand.
This article celebrates Ms. Forbes for her "work" on financial contagion. This is really a subdominant social theme of the power elite, that top economists can observe the complex workings of the economy, analyze them and provide economic technocrats with tools they can use to help counter the business boom and bust cycle.
We are to believe that central bankers are like doctors for the economy, though previously we've compared them to a priesthood. Certainly the mainstream media approaches them with great reverence – ordinarily reserved for medical men who heal us with the "drugs" of Big Pharma.
The Bloomberg article doesn't disappoint when it comes to reverence. It describes Ms. Forbes in a remarkable manner. We noticed this sort of approach previously with the new Governor for the Bank of England, Mark Carney. George Osborne was responsible for Carney's appointment and the British Guardian newspaper described Osborne's enthusiasm – his "man crush" – for his technocratic choice:
"Osborne said he had recommended Carney to David Cameron, who in turn recommended him to the Queen for appointment. The chancellor said Carney was "the outstanding central banker of his generation with unparalleled expertise in financial regulation".
He told MPs: "He will bring a fresh perspective. He has got what it takes to help bring families and businesses through these incredibly challenging economic times. My responsibility was to get the best for Britain, and with Mark Carney we've got that."
These statements are fascinating in part because they are as vague as they are worshipful. A central banker (like Ben Bernanke) fixes the price and volume of money using the power of government. How this makes Carney "outstanding" I'm not really sure. Is it because his presentation doesn't immediately inform you that he is an agent of state power? What is it about Carney that makes him "the best"?
Again, these questions arise if we keep in mind that the ultimatums of central banking are not voluntary. Carney's brief includes the use of state power to enforce his decision on interest rates. You might as well call England's top tax collector, the "outstanding revenuer of his generation." It really makes no difference. Both are engaged in making economic pronouncements leading to confiscatory policies that are then transmitted via state mandates.
Neither tax collector nor central banker is engaged in any kind of market-based activity. They are simply engaged in issuing dictats. So it is, unfortunately, with Ms. Forbes, though interestingly, there is nothing in her writing that reveals she intends for the state to use force to emplace her prescriptions. Here's more from the Bloomberg article:
When Kristin Forbes sought tenure at the Massachusetts Institute of Technology early last decade, some colleagues said her research focus on financial contagion led to a dead end. Her reaction: Full speed ahead.
Forbes worked to safeguard global financial stability with then-U.S. Treasury Undersecretary John Taylor, became the youngest member ever on the White House Council of Economic Advisers and eventually won tenure at MIT. In August she presented the opening paper at the Federal Reserve's annual symposium in Jackson Hole, Wyoming.
"Kristin is one of the leaders in the empirical analysis of contagion," said Roberto Rigobon, who, like Forbes, is a professor of economics at MIT's Sloan School of Management in Cambridge, Massachusetts, and has co-written research with her on the topic. "Her papers are a tour de force for anyone interested in measuring" its "importance, existence and extent."
Forbes, 42, says she still sees complacency over the risk that financial turmoil will spread beyond a single country, even with Europe's struggle to curb its sovereign-debt crisis. Regulators aren't doing enough to bolster preventative oversight, she said in an interview.
"Recently you've seen some softening of some of the regulatory requirements that are being talked about and some stepping back from some of the proposals," Forbes said.
"There's a trade-off obviously. In the middle of the crisis, having stricter capital requirements might delay a recovery, but it's critically important for the long-term stability."
Officials today may be tempted to bolster bank profitability by relaxing rules such as stress-test thresholds or by expanding the categories of assets that qualify toward liquidity buffers, Forbes said in the research she presented at Jackson Hole.
Forbes says she still sees complacency over the risk that financial turmoil will spread beyond a single country, even with Europe's struggle to curb its sovereign-debt crisis. Such loosening may backfire and "increase a country's vulnerability to contagion."
While requiring more capital may reduce the availability of credit, it also could offer nations "substantial benefits" by buffering against international panics. Tighter rules on bank reserves would reduce risks, acting on Forbes's finding that "countries with more-leveraged banking systems are significantly more vulnerable."
… Forbes' paper laid out the main pathways for the spread of a crisis, including trade, banks and financial institutions, along with investors who may be forced by losses in one country to sell assets in others. She also identified as a cause so- called "wake-up calls" — when new information about a nation's weaknesses compel a recalibration of risk beyond its borders.
Forbes said her research is especially relevant for the euro area today, and her Jackson Hole paper proposed prescriptions to alleviate that continent's crisis.
Europe's focus on sharing liabilities through the European Central Bank, European Stability Mechanism and European Financial Stability Facility may increase contagion risks as investors begin to question the solvency of countries providing bailout funds, she said.
Also, European policy makers confronting the risk of bank runs without a clear "lender of last resort" need to create a deposit-insurance system to "restore confidence" that funds will be accessible in the future, she wrote in her paper.
"Someone other than the Greek government needs to guarantee bank deposits in Greek banks," she said in the interview.
I have provided a long quote because I don't want the reader to believe I am being unfair to Ms. Forbes. So let me summarize based on what we read above.
Ms. Forbes is interested in what is called in banking parlance "contagion" – when one region is subject to economic collapse and in turn weakens other nearby regions and makes them vulnerable to economic collapse as well. The antidote to this contagion – what she seems to be suggesting – is that a single entity provide a clear-cut guarantee to depositors in modern banking systems that they will not lose their money.
European policy makers confronting the risk of bank runs without a clear "lender of last resort" need to create a deposit-insurance system to "restore confidence" that funds will be accessible in the future, she wrote in her paper. "Someone other than the Greek government needs to guarantee bank deposits in Greek banks," she said in the interview.
It cannot be clearer than that. She is making two decisive points. Europe needs to create an American-style guarantor for bank deposits. And it needs to do it on a pan-European scale.
This fits right in with the power elite's determination to centralize economic and political functions under Brussels and the ECB in the European Union. That's the REAL reason Ms. Forbes is getting the attention she is. She's provided the powers-that-be with a well reasoned rational for further consolidation and centralization.
In reality – in the REAL world – force is not the best way to deal with economic problems. One wants to FACILITATE markets. In fact, this is why regulation is so detrimental to the marketplace. It tends to force participants to do things in one way, which then deprives markets of strategic richness and tends to reinforce whatever has gone wrong.
Because there is so much regulation in the financial marketplace these days, almost every kind of investment is subject to unintended consequences (with the exception perhaps of gold and silver purchases via physical delivery).
Ms. Forbes's response to regulatory fragility has the same brutal simplicity as Alexander's when he cut through the Gordian Knot to untie it. If the impossibly complex, unworkable and illegitimate system of modern economics provides a constant specter of contagion, then let government provide an ironclad guarantee that savers will get their money back no matter what.
The problem with the current system is that it is based on fixing prices in defiance of the marketplace. The solution Ms. Forbes has proposed is that governments provide an ever LARGER price-fix. A universal one.
The powers-that-be are attracted to Ms. Forbes's solution because it provides them with a further justification to centralize economies. Explain why government needs more power and you will be feted, receive tenure and be subject to praiseworthy articles from Bloomberg and other mainstream media.
The reality, as I've tried to point out, is much different. The reality is one of price fixing using the brute force of government to impose those dictats.
And the title of this article describes the mechanism and those involved.